The relevance of the code of ethics to internal auditors facing threats and dilemmas

Abstract

PURPOSE: The study has three objectives: first, to analyse the possible factors that impact the internal auditors’ (IAors) ethical behaviour; secondly to ascertain the extent of IAor awareness of ethical dilemmas and threats and their ethical requirements in adhering to the Code of Ethics (the Code) and thirdly, to assess the context, and the extent to which, if at all, IAors consult with the Code. This includes comparing the respective attitudes adopted by in-house and outsourced IAors. DESIGN: A mixed-methods research approach was adopted. Semi-structured interviews were conducted with 22 participants consisting of nine IAors from Maltese listed entities (MLEreps), five IAors from Government entities (Govtreps) and eight outsourced IAors (Outreps). FINDINGS: IAors behave ethically primarily because it is morally correct, rather than to fulfil their obligations under the Code. In fact, the study found that the most influential factor for ethical behaviour is the IAors’ personality and character, noting however that a well-defined code of ethics, organisational culture, audit committee effectiveness and experience all exert notable influence on ethical behaviour. In-house IAors, particularly Govtreps, encounter ethical issues more frequently than Outreps, mainly as they have to audit their own colleagues. On the other hand, Outreps face more dilemmas related to upholding confidentiality of information. Additionally, all representatives perceive familiarity threat as the primary threat in their work, with Govtreps additionally identifying intimidation as a major threat. MLEreps do not perceive the Code as an effective tool to address the aforementioned dilemmas and threats. Additionally, despite most IAors voluntarily abiding with the Code, only few respondents consult and refer to the Code in their written reports. Maltese IAors expressed the need for an enhanced Code and guidelines, as due to the lack of specific practical examples in the Code, the Code of Ethics for Warrant Holders is usually resorted to for further guidance. CONCLUSIONS: The study concludes that no matter how detailed and relevant the Code is, the IAors’ own values and character will remain the most powerful weapons in dealing with threats and dilemmas. Nonetheless, IAors in Malta still require an enhanced Code, a regulatory framework and an official institute for them to be provided with the necessary guidance, oversight and support. Implementation of these measures would address the unique challenges prevalent in such a small country, result in establishing official sanctions for violating the Code, and ensure uniformity across all Maltese internal audit units (IAUs). IMPLICATIONS: This research attempts to highlight the need for better guidance for Maltese IAors through the introduction of regulatory provisions which would go a long way in developing the local internal audit profession. It also recommends a number of ways in which the relevance of the Code may be improved, and better support provided to IAors when dealing with threats and dilemmas.